OAH 8-1004-19793-1
Governor’s Tracking No. AR 320
STATE OF
OFFICE OF
ADMINISTRATIVE HEARINGS
FOR THE DEPARTMENT
OF COMMERCE
|
In the Matter of the Proposed Rules of the State Department of
Commerce Governing Credit Life and Credit Accident and Health Insurance, Minnesota Rules, Chapter 2760. |
REPORT OF THE ADMINISTRATIVE
LAW JUDGE |
Administrative Law Judge Eric L. Lipman
conducted a hearing concerning the above rules beginning at 9:30 a.m. on September
10, 2008, in the Summit Room of the Department of Commerce’s offices at
The hearing and this Report are part of a larger
rulemaking process governed by the Minnesota Administrative Procedure Act.[1] The Minnesota Legislature has designed this process
so as to ensure that state agencies have met all of the requirements that the
state has specified for adopting rules.
Those requirements include assurances that the proposed rules are
necessary and reasonable; that they are within the agency’s statutory authority;
and that any modifications that the agency may have made after the proposed
rules were initially published are within the scope of the matter that was
originally announced.
The hearing is intended to allow the agency
and the Administrative Law Judge reviewing the proposed rules to hear public
comment regarding the impact of the proposed rules and what changes might be
appropriate. The Administrative Law
Judge is employed by the Office of Administrative Hearings (OAH), an agency that
is independent of the Department of Commerce (Department or Commerce).
The members of the Department’s hearing
panel were Alberto Quintela (Minnesota Department of Commerce), Susan Bergh
(Minnesota Department of Commerce), William F. Burfiend (Consumer Credit
Industry Association), Christopher Hause (Hause Actuarial Solutions), Steven D.
Ostlie (Senior Counsel, Securian Financial Group). Seven members of the public signed the
hearing register and no members of the public spoke at the hearing.
The Department received no written comments
on the proposed rules before the hearing.
After the hearing, the record remained open for 5 working days, until September
17, 2008, to allow interested persons and the Department an opportunity to
submit written comments. The OAH hearing
record closed on September 24, 2008. No
comments were submitted during the post-hearing comment period.
SUMMARY OF
CONCLUSIONS
The Department has established that it has
the statutory authority to adopt the proposed rules and that the rules are
necessary and reasonable.
Based upon
all the testimony, exhibits, and written comments, the Administrative Law Judge
makes the following:
Nature of the Proposed Rules
1.
This
rulemaking proceeding involves revising the rules governing the Department’s
review of credit insurance rates and forms.
2.
Credit
insurance is a form of term insurance that is sold in connection with consumer
lending transactions, and is a highly regulated insurance offering under state
law. Minnesota Statutes, Chapter 62B
regulates the types of policies of credit insurance polices that may be offered
for sale in Minnesota; limits the size of policies relative to debts;
establishes term periods, requiring refunds in the event of loan prepayment;
and mandates policy provisions, rates, forms and policy delivery terms. Likewise important, under Chapter 62B, the
Commissioner of Commerce has the authority to review insurance premium rates
and to impose sanctions for violations of orders concerning credit insurance.[2]
3.
4.
The
proposed rule establishes a set of prima
facie rates that may be used by credit insurers without further proof of
reasonableness. Without such a schedule
of prima facie rates, the Department
would be obliged to review each company’s rate filing separately for
reasonableness – an approach that creates high costs for both the Department
and the regulated companies. The Department argues that the proposed rules will
be a cost-effective method of ensuring that regulated companies are meeting the
State’s loss-ratio expectations.[4]
5.
The Department’s
preferred regulatory approach follows the methodology used in the National
Association of Insurance Commissioners Model Act and regulations – and proposes
to use NAIC forms and infrastructure in order to meet regulatory objectives.[5]
6.
The Department
has collaborated with industry representatives and interested stakeholders in
order to develop a new set of rules that will establish prima facie premium rates, streamline the rate approval process, improve
policy benefits for
7.
The
Department first adopted rules in this area in 1968. Since that time, the rules have been amended and
renumbered several times, with the last revision occurring in 1987.[7]
8.
In
developing the proposed rules the Department undertook talks with various
industry members of the Consumer Credit Industry Association, an outside
actuarial consultant and the consumer representative of the National
Association of Insurance Commissioners.[8]
9.
On
December 26, 2007, the Department published a Request for Comments in the State Register.[9]
10.
By
letter dated July 15, 2008, the Department requested that the Office of
Administrative Hearings schedule a hearing and assign an Administrative Law
Judge. On that day, the Department also
filed a proposed Notice of Hearing, a copy of the proposed rules and a draft of
the Statement of Need and Reasonableness (SONAR).[10]
11.
In a
letter dated July 22, 2008, the undersigned approved the Department’s Notice of
Hearing and Additional Notice Plan, contingent upon the addition of two entities
to the Additional Notice Plan.[11]
12.
On August
5, 2008, the Department mailed the Notice of Hearing to all persons and
associations who had registered their names with the agency for the purpose of
receiving such notice and to all persons identified in the additional notice
plan. The Notice of Hearing stated that
a free copy of the proposed rules was available upon request from the agency
contact person.[12]
13.
On August
5, 2008, the Department sent a copy of the Notice of Hearing and Statement of
Need and Reasonableness to the legislators specified in Minn. Stat. § 14.116.[13]
14.
On August
5, 2008, the Department mailed a copy of the Statement of Need and
Reasonableness to the Legislative Reference Library.[14]
15.
On August
11, 2008, the proposed rule and the Notice of Hearing were published at 33 State Register 280.[15]
16.
On the
day of the hearing the following documents were placed in the record:
·
The Request
for Comments published on December 26, 2007 at 31 State Register 805 (Ex. 1);
·
A copy
of the proposed rules with Revisor’s approval dated July 14, 2008 (Ex. 2);
·
A copy
of the Statement of Need and Reasonableness (SONAR) dated May 19, 2008 (Ex. 3);
·
Copies
of supporting material, including: The Final Rule Report in the Matter of the Proposed Amendments to the
Rules Relating to the Sale of Credit Life Insurance, OAH Docket No.
8-1004-1908-1 (1998); an excerpt from the April 2002 issue of the Federal Reserve Bulletin; and an October
8, 2007 Special Report from A.M. Best Research (Ex. 3);
·
A copy
of the transmittal letter showing the agency sent a copy of the SONAR to the Legislative
Reference Library (Ex. 4);
·
The
Notice of Hearing as mailed and as published on August 11, 2008 at 33 State Register 280 (Ex. 5);
·
Certificate
of Mailing the Notice of Hearing to the Rulemaking Mailing List and a Certificate
of Accuracy of the Mailing List, both dated August 5, 2008 (Ex. 6);
·
Certificate
of Mailing pursuant to the Additional Notice Plan (Ex. 7);
·
A
statement detailing that no written comments on the proposed rules were
received by the agency during the comment period (Ex. 8);
·
Certificate
of Mailing to legislative leaders specified by Minn. Stat. 14.116 (Ex. 9);
·
Correspondence
with Executive Budget Officer Keith Bogut of the Minnesota Department of
Finance and Employee Relations; (Ex. 10) and,
·
Written
testimony of Julia Philips, of the Minnesota Department of Commerce, William F.
Burfeind, of the Consumer Credit Industry Association, Christopher H. Hause, of
Hause Actuarial Solutions, and Steven D. Ostlie, of Securian Financial
Group. (Exs. 11, 12, 13 and 14)
17.
Minnesota
Statutes §§ 14.131 and 14.23, require that the SONAR contain a description of
the Department’s efforts to provide additional notice to persons who may be
affected by the proposed rules. As noted
above, the Department submitted an additional notice plan to the Office of
Administrative Hearings, which reviewed and approved it, with modifications, by
way of a letter dated July 22, 2008. In
addition to notifying those persons on the Department’s rulemaking list and
additional notice list, the Department pledged that it would provide notice to
the following entities:
·
The Consumer Protection Division of the
Minnesota Attorney General’s Office;
and
·
The Citizens' Council on Health Care.[16]
18.
The
Administrative Law Judge finds that the Department did give notice to those
individuals contained in its Additional Notice Plan on August 5, 2008.[17]
19.
Pursuant
to Minn. Stat. § 62B.12, the Department has authority, after notice and a
hearing to issue appropriate rules for the supervision of life insurance, accident and health insurance, and
involuntary unemployment insurance in connection with loan or other credit
transactions.
20.
The
Administrative Law Judge finds that the Department has the statutory authority
to adopt the proposed rules.
Regulatory Analysis in the
SONAR
21.
The
Administrative Procedure Act obliges an agency adopting rules to address seven
factors in its Statement of Need and Reasonableness. Those factors are:
(1)
A
description of the classes of persons who probably will be affected by the
proposed rule, including classes that will bear the costs of the proposed rule
and classes that will benefit from the proposed rule.
22.
Among
the classes of persons affected by the proposed rules will be insurance company
issuers of credit life and credit disability insurance; lender and creditor
producers of such insurance including banks; finance companies; credit unions;
automobile dealers; retailers; and borrowers.[18]
23.
The
Department asserts that insurance company issuers and lender creditor producers
will bear the costs of premium rate reductions, computer program system changes
and insurance policy and certificate form amendments that are associated with
the proposed rule. These regulated
parties are also slated to benefit from the lower compliance costs associated
with the reform of the rate review process.[19]
24.
The
Department also projects that consumers who seek the types of credit
arrangements that are regulated by the proposed rules, will benefit from lower
premium rates, expanded menus of policy benefits and more robust consumer
protections.[20]
(2)
The
probable costs to the Agency and to any other agency of the implementation and
enforcement of the proposed rule and any anticipated effect on state revenues.
25.
The
Department estimates that it will incur approximately $8,000 in rulemaking
costs, all or some of which may be passed on to the insurance companies who
submit proposed rates for review.[21]
26.
The
Department likewise estimates that the streamlined rate review procedures will
create administrative efficiencies for the agency and better focus its
oversight resources on to those companies that deserve additional scrutiny.[22]
27.
Under
(3) The determination of whether there are less costly methods or less intrusive methods for achieving the purpose of the proposed rule.
28.
In
developing the proposed rules the Department reviewed its own enforcement
history under the current version of Chapter 2760, the model regulations
promulgated by the National Association of Insurance Commissioners (NAIC) and a
set of technical suggestions from the Department’s actuary, an actuarial
consultant and the NAIC consumer representative.[24]
29.
While
loss ratios for credit life insurance loss and credit accident and health
insurance vary considerably from state to state, members of the agency panel
established that the Department’s preferred 50 percent loss ratio standard is:
consonant with the loss ratios demanded by other states; a “self-supporting”
standard that can be met by a number of insurance carriers; likely to result in
insurance product choices for consumers that have reasonable rates in relation
to their benefits; and the standard that is most often selected by states that
regulate loss ratios in this field.[25]
(4) A description of any alternative methods for achieving the purpose of the proposed rule that were seriously considered by the agency and the reasons why they were rejected in favor of the proposed rule.
30.
The Department’s
key regulatory purposes underlying the proposed rules are “to protect the
interests of debtors and the public in this state by providing a system of
rates, policy form, and operating standards for the transaction of credit life
and credit accident and health insurance ….”[26] The Commissioner considered three methods for
achieving this regulatory purpose, namely:
(1) a “pure loss ratio” regulatory standard; (2) a “component analysis
method” regulatory standard; and (3) a combination of a “pure loss ratio” and a
“component analysis method.”[27]
31.
A “pure
loss ratio” regulatory standard would require the Commissioner to establish a
minimum loss ratio that insurance companies would target in setting their rates
and further require that this loss ratio equal the benefits to consumers
divided by the premiums. While this
standard is a simple method to administer, the Commissioner rejected this
approach. A key shortcoming of a “pure
loss ratio” standard is that because the expense and profit portions of the
premium either increase or decrease in proportion to overall claims, companies
make inadequate expense allowances when near-term claim experience is
relatively low and make excessive expense allowances when claim experience is
comparatively high.[28]
32.
A “component
analysis method” regulatory standard would require the Department staff to
analyze the statutory components of each rate on a company by company basis,
setting a reasonable rate level for each company. While this method is arguably the most
equitable, completing an evaluation of the rates of at least 40 different
insurance companies, for each period of review, requires a great deal of agency
resources.[29]
33.
The
Department’s preferred approach is a hybrid system that blends the beneficial features
of each method. By establishing a
schedule of premium rates that is expected to produce a 50 percent loss ratio, the proposed rules draw upon the
regulatory simplicity of a loss ratio standard.
Similarly, by establishing prima facie rates that are equal to the
current rates now prevalent for credit life insurance, and significantly lower than
current rates for credit accident and health insurance, the proposed rules draw
upon the equity of the component analysis method.[30]
(5) The probable costs of complying with the proposed rules.
34.
The
Department projects that the initial compliance costs associated with the
proposed rules are approximately $500,000 – eighty percent of which will be borne
by insurance companies and twenty percent of which will be borne by lenders and
creditors. These costs are associated
with programming computer systems and resubmission of outdated forms and
premium rates. The Department argues
that by permitting compliance with the new rules within 180 days of their
effective date, insurance companies may be able to avoid some of the compliance
costs associated with the new rules by updating their processes and materials alongside
changes made in the regular course of their businesses.[31]
(6) The probable costs or consequences of not adopting the proposed rule, including those costs borne by individual categories of affected parties, such as separate classes of governmental units, businesses, or individuals.
35.
The
Department asserts that among the probable consequences of not adopting the
proposed rules are: increased instability and uncertainty in this domain of the
insurance market; increases in the number of firms exiting the Minnesota market
for the products regulated by the proposed rules; decreases in the amount of
premium tax revenue captured by the state as lenders and creditors choose other,
non-regulated debt protection products; and impacts to agency staff time as the
Department continues to administer a less-effective set of regulatory
standards.[32]
(7) An assessment of any differences between the proposed rules and existing federal regulation and a specific analysis of the need for and reasonableness of each difference.
36.
The
Department asserts that the proposed rules fit into a regulatory gap that is
alongside, and not inconsistent with either the Federal Truth in Lending
Act or the Act’s implementing regulations – “Regulation Z” found in 12 C.F.R. Part 226. The Department notes that the Truth in
Lending Act provides that voluntary credit insurance premiums may be excluded
from loan finance charges so long as the insurance coverage is not required to
complete the transaction; certain disclosures to the consumer are made; and the
consumer signs an affirmative written request for coverage.[33]
37.
The
Administrative Procedure Act[34]
also requires an agency to describe how it has considered and implemented the
legislative policy supporting performance based regulatory systems. A performance based rule is one that
emphasizes superior achievement in meeting the agency’s regulatory objectives
and maximum flexibility for the regulated party and the agency in meeting those
goals.[35]
38.
The
Department asserts that the proposed rules are performance-based, particularly because
the rules permit alternate methods of establishing the reasonableness of
premium rates to be charged by providers of credit life and credit
accident and heath insurance, and because the set of prima facie rates will themselves undergo a triennial review by
Department staff.[36]
Consultation with the Commissioner of Finance
39.
Under
Minn. Stat. § 14.131, the agency is also required to “consult with the
commissioner of finance to help evaluate the fiscal impact and fiscal benefits
of the proposed rule on units of local government.”
40. On June 4, 2008, the Department sent draft copies of the proposed rules and the SONAR to Executive Budget Officer Keith Bogut.[37]
41. By way of a Memorandum dated June 25, 2008, Mr. Bogut opined that because the proposed rules “are intended for individuals, units of government would not benefit from entering into such contracts, and therefore are unlikely to bear any costs related to the proposed changes.”[38]
42.
The
Administrative Law Judge finds that the Department has met the requirements set
forth in Minn. Stat. § 14.131 for assessing the impact of the proposed rules,
including consideration and implementation of the legislative policy supporting
performance-based regulatory systems.
Analysis Under
43.
After
July 1, 2005, under Minn. Stat. § 14.127, the Department must “determine if the
cost of complying with a proposed rule in the first year after the rule takes
effect will exceed $25,000 for: (1) any
one business that has less than 50 full-time employees; or (2) any one
statutory or home rule charter city that has less than ten full-time employees.”[39] The Department must make this determination
before the close of the hearing record, and the Administrative Law Judge must
review the determination and approve or disapprove it.[40]
44.
The
Department established that the proposed rule amendments will not cost
businesses with fewer than fifty employees or small city governments more than
$25,000 in the first year of enactment.[41]
45.
The
Administrative Law Judge finds that the agency has made the determination
required by Minn. Stat. § 14.127 and approves that determination.
46.
The
delegation of rulemaking authority in favor of the Department in this instance
is very broad. Under Minn. Stat. § 62B.12,
the Legislature authorized the Commissioner of Commerce to “after notice and
hearing, issue rules the commissioner deems appropriate for the supervision of
sections 62B.01 to 62B.14.”
47.
Further,
under Minn. Stat. § 14.14, subd. 2, and Minn. Rule 1400.2100, a determination
must be made in a rulemaking proceeding as to whether the agency has
established the need for and reasonableness of the proposed rule by an
affirmative presentation of facts. In
support of a rule, an agency may rely upon “legislative facts” – namely general
facts concerning questions of law, policy and discretion – or it may rely upon its
considered interpretation of a statute or stated policy preferences.[42] The
Department prepared a Statement of Need and Reasonableness (SONAR) in support
of the proposed rules. At the hearing, the
Department relied upon the SONAR and the testimony of its panelists as its affirmative
presentation of need and reasonableness for the proposed rules.
48.
The
question of whether a rule has been shown to be reasonable focuses upon whether
it has been shown to have a rational basis that is grounded in the rulemaking
record.
49.
The
Minnesota Supreme Court has further defined an agency’s burden in adopting
rules by requiring it to “explain on what evidence it is relying and how the
evidence connects rationally with the agency’s choice of action to be taken.”[46] An agency is entitled to make choices between
possible approaches as long as the choice made is rational. Generally, it is not the proper role of the
Administrative Law Judge to determine which policy alternative presents the
“best” approach, because such a determination would invade the policy-making
authority that has been delegated to the agency by the Minnesota Legislature. Accordingly, during a later review of the
proposed rules, the inquiry is whether the choice made by the agency is one
that a rational person could have made under the circumstances.[47]
50.
In
addition to need and reasonableness, the Administrative Law Judge must also
assess other factors; namely: whether the agency has complied with rule
adoption procedures; whether the rule grants undue discretion; whether the Department
has statutory authority to adopt the rule; whether the rule is unconstitutional
or illegal; whether the rule constitutes an undue delegation of authority to
another entity; or whether the proposed language is not a rule.[48]
51.
The proposed rules were not opposed and were
adequately supported by the SONAR, hearing testimony and hearing exhibits. Accordingly, a detailed discussion of each
section of the proposed rules is not necessary.
52.
The
Administrative Law Judge finds that the Department has demonstrated by an
affirmative presentation of the facts, the need for, and reasonableness of, all
of the proposed rules. The proposed
rules are authorized by statute and there are no other shortcomings that would
prevent the adoption of these rules.
Based upon the foregoing Findings of Fact,
the Administrative Law Judge makes the following:
1.
The Minnesota
Department of Commerce gave proper notice of the hearing in this matter.
2.
The Department
has fulfilled the procedural requirements of Minn. Stat. § 14.14 and all other
procedural requirements of law or rule.
3.
The Department
has demonstrated its statutory authority to adopt the proposed rules and has
fulfilled all other substantive requirements of law or rule within the meaning
of Minn. Stat. §§ 14.05, subd. 1, 14.15, subd. 3, and 14.50 (i) and (ii).
4.
The Department
has demonstrated the need for and reasonableness of the proposed rules by an
affirmative presentation of facts in the record within the meaning of Minn.
Stat. §§ 14.14, subd. 4 and 14.50 (iii).
5.
Any
Findings that are more properly characterized as Conclusions are hereby adopted
as such and incorporated by reference.
Any Conclusions that are more properly characterized as Findings are
hereby adopted as such and incorporated by reference.
6.
A
finding or conclusion of need and reasonableness in regard to any particular
rule subsection does not preclude, and should not discourage, the Department
from further modification of the proposed rules based upon an examination of
the public comments; provided that the rule finally adopted is based upon the
facts appearing in this rule hearing record.
Based upon the foregoing Conclusions, the
Administrative Law Judge makes the following:
IT IS HEREBY RECOMMENDED that the proposed
rules be adopted.
Dated: October 17, 2008
|
/s/ Eric L. Lipman ______________________ |
|
ERIC L. LIPMAN |
|
Administrative
Law Judge |
|
|
Reported: Digitally Recorded
NOTICE
The Department must make this Report available for review by anyone who wishes to review it for at least five working days before it may take any further action to adopt final rules or to modify or withdraw the proposed rules. If the Department makes changes in the rules, it must submit the rules, along with the complete hearing record, to the Chief Administrative Law Judge for a review of those changes before it may adopt the rules in final form.
After adopting the final version of the rules, the Department must submit this version to the Revisor of Statutes for a review as to its form. If the Revisor of Statutes approves the form of the rules, the Revisor will submit certified copies to the Administrative Law Judge, who will then review the same and file them with the Secretary of State. When the final rules are filed with the Secretary of State, the Administrative Law Judge will notify the Department, and the Department will notify those persons who requested to be informed of their filing.
[1]
[2] See,
[3]
[4] See, SONAR at 3 - 5.
[5]
[6] SONAR at 3 – 5; Exhibits 12, 13 and 14.
[7] SONAR at 2; In the Matter of the Proposed Amendments to the Rules Relating to the Sale of Credit Life Insurance, OAH Docket No. 8-1004-1908-1 at 8 (1998) (included at Ex. 3).
[8] SONAR at 7.
[9] Ex.1.
[10] Letter from Susan Bergh (July 15, 2008).
[11] See, Letter of Hon. Eric L. Lipman (July 22, 2008).
[12] Exs. 5, 6 and 7.
[13] Ex. 9.
[14] Ex. 4.
[15] Ex. 5.
[16] See, Letter of Hon. Eric L. Lipman (July 22, 2008).
[17] See, Ex. 5.
[18] SONAR at 6.
[19]
[20]
[21]
[22]
[23] SONAR at 6 – 7.
[24]
[25] Hearing Testimony of Julia Phillips; Hearing Testimony of Christopher Hause.
[26] Ex. 2 (Proposed Rule 2760.0010).
[27] SONAR at 8.
[28]
[29]
[30]
[31]
[32]
[33]
[34]
[35]
[36] SONAR at 10.
[37] Ex. 11.
[38]
[39] Minn. Stat. § 14.127, subd. 1 (2006).
[40] Minn. Stat. § 14.127, subd. 2 (2006).
[41] Ex. 11.
[42] See,
Mammenga v. Department of Human Services, 442 N.W.2d 786 (
[43] See, In re Hanson, 275 N.W.2d 790 (
[44] See, Greenhill v. Bailey, 519 F.2d 5, 19 (8th Cir. 1975).
[45] See, Mammenga,
442 N.W.2d at 789-90; Broen Memorial Home
v. Department of Human Services, 364 N.W.2d 436, 444 (
[46] See, Manufactured Housing Institute, 347 N.W.2d at 244.
[47] See,
Federal Security
[48]